1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998.
Or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____,
19__.
Commission File Number: 333-38623
MAXXIS GROUP, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 22-78241
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1901 MONTREAL ROAD, SUITE 108, TUCKER, GEORGIA 30084
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 696-6343
Indicate by a check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at February 16, 1999
Common Stock, no par value 1,571,187
================================================================================
2
MAXXIS GROUP, INC.
INDEX TO FORM 10-Q
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements................................................ 3
Condensed Consolidated Balance Sheets as of
December 31, 1998 (Unaudited) and June 30, 1998..................... 3
Condensed Consolidated Statements of Operations for the
Three Months and Six Months ended December 31, 1998
and 1997 (Unaudited)................................................ 4
Condensed Consolidated Statements of Cash Flows for the
Six Months ended December 31, 1998 and 1997 (Unaudited)............. 5
Notes to Condensed Consolidated Financial
Statements (Unaudited).............................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 8
Item 3. Quantitative and Qualitative Disclosure About
Market Risks........................................................ 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................... 15
Item 6. Exhibits and Reports on Form 8-K.................................... 15
SIGNATURES
2
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 JUNE 30, 1998
------------------ ----------------
(UNAUDITED)
ASSETS
Current assets:
Cash............................................................ $ 419,000 $ 372,000
Short-term investments.......................................... 10,000 10,000
Communications receivable, net of allowance for
doubtful accounts of $40,000.................................. 696,000 316,000
Inventories, net................................................ 553,000 218,000
Prepaid expenses................................................ 24,000 43,000
Other current assets............................................ 28,000 --
------------------ ----------------
Total current assets.......................................... 1,730,000 959,000
Property and equipment, net........................................ 6,088,000 169,000
Capitalized software development costs, net........................ 184,000 126,000
Investments........................................................ 100,000
Other assets....................................................... 253,000 9,000
------------------ ----------------
Total assets.............................................. $ 8,355,000 $ 1,263,000
================== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 384,000 $ 211,000
Commissions payable............................................. 200,000 101,000
Taxes payable................................................... 463,000 130,000
Current maturities of long-term capital lease obligations....... 393,000 --
Accrued liabilities............................................. 438,000 282,000
Deferred revenue................................................ 57,000 55,000
------------------ ----------------
Total current liabilities..................................... 1,935,000 779,000
------------------ ----------------
Long-term liabilities:
Long-term capital lease obligations............................. 4,866,000 --
Line of credit.................................................. 800,000 --
------------------ ----------------
Total long-term liabilities................................... 5,666,000 --
------------------ ----------------
Shareholders' equity:
Preferred Stock, no par value; 10,000,000 shares authorized;
100,000 shares designated as Series A Convertible Preferred
Stock of which 36,359 shares are issued and outstanding....... 200,000 200,000
Common Stock, no par value; 20,000,000 shares authorized;
1,571,187 shares issued and outstanding....................... 612,000 574,000
Subscription receivable........................................ (120,000) (120,000)
Accumulated earnings (deficit).................................. 62,000 (170,000)
------------------ ----------------
Total shareholders' equity.................................... 754,000 484,000
------------------ ----------------
Total liabilities and shareholders' equity................ $ 8,355,000 $ 1,263,000
================== ================
The accompanying notes are an integral part of these consolidated statements.
3
4
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ -------------
Net revenues:
Communications services..................... $ 1,435,000 $ 1,122,000 $ 5,121,000 $ 2,588,000
Nutritional products........................ 255,000 186,000 630,000 186,000
Marketing services.......................... 398,000 318,000 1,440,000 670,000
------------ ------------ ------------ -------------
Total net revenues........................ 2,088,000 1,626,000 7,191,000 3,444,000
------------ ------------ ------------ -------------
Cost of services:
Communications services..................... 201,000 430,000 908,000 868,000
Nutritional products........................ 159,000 77,000 360,000 77,000
Marketing services.......................... 84,000 127,000 637,000 228,000
------------ ------------ ------------ -------------
Total cost of services.................... 444,000 634,000 1,905,000 1,173,000
------------ ------------ ------------ -------------
Gross margin................................... 1,644,000 992,000 5,286,000 2,271,000
------------ ------------ ------------ -------------
Operating expenses:
Selling and marketing....................... 1,054,000 610,000 3,059,000 1,326,000
General and administrative.................. 1,073,000 514,000 1,850,000 1,111,000
------------ ------------ ------------ -------------
Total operating expenses.................. 2,127,000 1,124,000 4,909,000 2,437,000
------------ ------------ ------------ -------------
Operating income (loss)........................ (483,000) (132,000) 377,000 (166,000)
Interest income (expense)...................... 5,000 (2,000) 5,000 (2,000)
------------ ------------ ------------ -------------
Income (loss) before income taxes (benefit).... (478,000) (134,000) 382,000 (168,000)
Provision (benefit) for income taxes........... (130,000) -- 150,000 --
------------ ------------ ------------ -------------
Net income (loss).............................. $ (348,000) $ (134,000) $ 232,000 $ (168,000)
============ ============ ============ =============
Income (loss) per share:
Basic....................................... $ (0.22) $ (0.09) $ 0.15 $ (0.11)
============ ============ ============ =============
Diluted..................................... $ (0.22) $ (0.09) $ 0.14 $ (0.11)
============ ============ ============ =============
Weighted average number of shares outstanding:
Basic....................................... 1,571,187 1,571,187 1,571,187 1,571,187
============ ============ ============ =============
Diluted..................................... 1,571,187 1,571,187 1,614,364 1,571,187
============ ============ ============ =============
The accompanying notes are an integral part of these consolidated statements.
4
5
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31,
---------------------------
1998 1997
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................. $ 232,000 $(168,000)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization ............................... 252,000 99,000
Compensation expense related to stock options ............... 38,000 --
Changes in assets and liabilities:
Communications receivables ................................ (380,000) (179,000)
Inventories ............................................... (335,000) 1,000
Prepaid expenses .......................................... 19,000 (24,000)
Other assets .............................................. (28,000) 22,000
Accounts payable .......................................... 173,000 184,000
Commissions payable ....................................... 99,000 34,000
Taxes payable ............................................. 333,000 --
Accrued liabilities ....................................... 156,000 (55,000)
Deferred revenue .......................................... 2,000 --
----------- ---------
Total adjustments ....................................... 329,000 82,000
----------- ---------
Net cash provided by operating activities .......... 561,000 (86,000)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .......................................... (188,000) (87,000)
Software development costs .................................... (281,000) (50,000)
Purchase of equity investment ................................. (100,000) --
----------- ---------
Net cash used by investing activities .............. (569,000) (137,000)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (payments) from (for) issuance of common stock ....... (244,000) 87,000
Line of credit borrowings ..................................... 800,000 230,000
Payments on capital lease obligations ......................... (501,000) --
----------- ---------
Net cash provided (used) by financing activities ... 55,000 317,000
----------- ---------
NET INCREASE IN CASH EQUIVALENTS ................................. 47,000 94,000
CASH AND CASH EQUIVALENTS, beginning of the period ............... 372,000 35,000
----------- ---------
CASH AND CASH EQUIVALENTS, end of the period ..................... $ 419,000 $ 129,000
=========== =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Capital lease obligations incurred ............................ $ 5,759,000 $ --
=========== =========
The accompanying notes are an integral part of these consolidated statements.
5
6
MAXXIS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND PRESENTATION
Maxxis Group, Inc., a Georgia corporation (the "Company"), was
incorporated on January 24, 1997 and is headquartered in Tucker,
Georgia. The Company's principal business operations are carried out
through its wholly owned subsidiaries, Maxxis 2000, Inc. and Maxxis
Communications, Inc., each of which began operations in March 1997, and
Maxxis Nutritionals, Inc., which began operations in November 1997. The
Company was founded for the purpose of providing long-distance
services, private label nutritional products, and other services and
consumable products through a multilevel marketing system of
independent associates ("IAs"). The Company's IAs currently market
communications and Internet services and nutritional and health
enhancement products.
The Company has a limited operating history, and its operations are
subject to the risks inherent in the establishment of any new business.
Since the Company has only recently made the transition to an operating
company, the Company's ability to manage its growth and expansion will
require it to implement and continually expand its operational and
financial systems, recruit additional IAs, and train and manage both
current and new IAs. Continued growth would place a significant strain
on the Company's operational resources and systems, and failure to
effectively manage any such growth would have a material adverse effect
on the Company's business, financial condition and results of
operations.
2. UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the unaudited financial statements
contain all the normal and recurring adjustments necessary to present
fairly the financial position of the Company as of December 31, 1998
and the results of the Company's operations and its cash flows for the
three and six month periods ended December 31, 1998 and 1997 in
conformity with generally accepted accounting principles. The results
of operations are not necessarily indicative of the results to be
expected for the full fiscal year.
3. INVENTORIES
Inventories consist of the following:
DECEMBER 31, JUNE 30,
1998 1998
------------ ------------
Prepaid phone cards $ 25,000 $ 10,000
Sales aids 241,000 158,000
Nutritional products 287,000 76,000
Less reserve -- (26,000)
------------ ------------
$ 553,000 $ 218,000
============ ============
4. CAPITAL LEASE OBLIGATIONS
On September 29, 1998, the Company entered into certain leases for
telephone switching equipment, which are classified as capital lease
obligations. These leases expire within five years and have purchase
options at the end of the original lease term. Assets under capital
leases are included in property and equipment in the December 31, 1998
consolidated balance sheet at a fair market value of approximately
$5,759,000.
6
7
5. LINE OF CREDIT
On November 22, 1998, the Company entered into a line of credit (the
"Line of Credit") with the Maxxis Millionairre Society, a Georgia
partnership. Ivey Stokes and Alvin Curry, the Company's Chairman of the
Board and Chief Operating Officer, respectively, are partners in the
Maxxis Millionairre Society. Pursuant to the Line of Credit, Maxxis may
borrow up to $1,000,000 at 10% annual interest. No advances or interest
thereon pursuant to the Line of Credit are payable until November 22,
2000.
7
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Maxxis Group, Inc., a Georgia corporation ("Maxxis" or the "Company"),
markets communications and Internet services and nutritional and health
enhancement products in the United States through its multi-level network
marketing system of "independent associates," or "IAs." The Company operates
through its subsidiaries: Maxxis 2000, Inc. ("Maxxis 2000"); Maxxis
Communications, Inc. ("Maxxis Communications"); and Maxxis Nutritionals, Inc.
("Maxxis Nutritionals").
Maxxis 2000 is a network marketing company that currently markets
1-Plus long distance service, travel cards, prepaid phone cards, 800 service and
international telecommunications services, Internet access and Web-page
development and hosting services, and nutritional and health enhancement
products. The Company believes that its multi-level network marketing system
allows it to obtain customers for its products in a cost effective manner and to
enhance customer retention because of the relationships between the Company's
IAs and customers. The telecommunications customer base developed by the
Company's IAs provides a potential customer base for the Company's nutritional
and health enhancement products, Internet-related services and for future
products.
The Company has built a customer base without committing capital or
management resources to construct its own communications network and
transmission facilities. In February 1997, Maxxis Communications contracted with
Colorado River Communications, Corp. ("CRC") to obtain switching and network
services and to allow CRC's communications services to be sold by the Company's
IAs. Maxxis Communications obtains telecommunications services and purchases
time for its prepaid 1 hour and 30 minute phone cards from CRC. In September
1998, the Company entered into a long-term lease commitment for the exclusive
use of telecommunications switching equipment (the "Maxxis Switch") along with
certain ancillary computer hardware and software required to operate the Maxxis
Switch. The Company is currently in the process of filing tariffs and applying
for the required regulatory approvals necessary to offer interstate and
intrastate long distance service throughout the United States. In 1999, Maxxis
intends to migrate its long distance customers from CRC's network to the Maxxis
Switch and intends to sell additional network capacity, to the extent available,
to third parties.
In November 1997, the Company began marketing several private label
dietary supplements to its customers and IAs. Recently, the Company began
marketing additional nutritional and health enhancement products that are
manufactured by various suppliers. In September 1998, the Company began
providing Internet access and Web-page development and hosting services.
Internet access is provided by Maxxis Communications through its agreement with
InteReach Internet Services, LLC, and Web-page development and hosting services
are provided by Maxxis Communications.
The Company conducts its marketing activities exclusively through its
network of IAs. The Company believes that IAs are generally attracted to the
Company's multi-level network marketing system because of the potential for
supplemental income and because the IAs are not required to purchase any
inventory, have no monthly sales quotas or account collection issues, have
minimal required paperwork and have a flexible work schedule. The Company
encourages IAs to market services and products to persons with whom the IAs have
an ongoing relationship, such as family members, friends, business associates
and neighbors. The Company also sponsors meetings at which current IAs are
encouraged to bring in others for an introduction to the Company's marketing
system. The Company's multi-level network marketing system and the Company's
reliance upon IAs are intended to reduce marketing costs, customer acquisition
costs and customer attrition. The Company believes that its multi-level network
marketing system will continue to build a base of potential customers for
additional services and products.
The Company derives revenues from communications services, nutritional
products and marketing services. Communications services revenues are comprised
of: sales of prepaid phone cards to the Company's IAs; commissions from the
Company's agreement with CRC whereby the Company receives a percentage of the
long distance billings received by CRC from the customers originated by the
Company's IAs, net of allowances
8
9
for bad debts and billing adjustments; and subscription fees from the Company's
Internet subscribers. Because of the administrative procedures that must be
complied with in order to establish 1-Plus customers and to collect the usage
and access fees from the local exchange carriers, there is generally a delay of
up to three to four months from the time a prospective customer indicates a
desire to become a 1-Plus customer and the time that the Company begins to
receive commissions from such customer's usage.
Nutritional products revenues include sales of private-label
nutritional products to the Company's IAs. Recently, the Company began marketing
new health enhancement products and additional nutritional products, including a
weight management program and skin care system. Marketing services revenues
include application fees from IAs and purchases of sales aids by IAs, including
distributor kits which consist of forms, promotional brochures, audio and video
tapes, marketing materials and presentation materials. Marketing services
revenues also include training fees paid by senior associates and "managing
directors" or "MDs." To become an IA, individuals (other than individuals in
North Dakota) must complete an application and purchase a distributor kit for
$99. IAs also pay an annual non-refundable fee in order to maintain their status
as an IA, which fee the Company amortizes over the renewal period. To become a
MD, a senior associate, director or regional director must attend a Company
approved training school. The fee to attend the training school is currently
$99, and MDs must attend continuing education training schools each year which
also are subject to a fee. The training fees are recognized at the time the
training is received. The Company does not receive any fees from IAs for the
training provided by MDs or national training directors.
Cost of services consists of communications services cost, nutritional
products cost and marketing services cost. Communications services cost consists
primarily of the cost of purchasing activated prepaid phone cards. Nutritional
products cost consists of the cost of purchasing private label nutritional
products. Marketing services cost includes the costs of purchasing IA
distributor kits, sales aids and promotional materials and training costs.
Operating expenses consist of selling and marketing expenses and general and
administrative expenses. Selling and marketing expenses include commissions paid
to IAs based on: (i) sales of products to new IAs sponsored into the Company;
(ii) usage of long distance services by customers; and (iii) sales of additional
products and services to customers. General and administrative expenses include
costs for IA support services, information systems services and administrative
personnel to support the Company's operations and growth.
The Company has a limited operating history, and its operations are
subject to the risks inherent in the establishment of any new business. The
Company expects that it will incur substantial initial expenses, and there can
be no assurance that the Company will maintain profitability. If the Company
continues to grow rapidly, the Company will be required to continually expand
and modify its operational and financial systems, add additional IAs and new
customers, and train and manage both current and new employees and IAs. Such
rapid growth would place a significant strain on the Company's operational
resources and systems, and the failure to effectively manage any such growth
could have a material adverse effect on the Company's business, financial
condition and results of operations.
9
10
RESULTS OF OPERATIONS
The following table sets forth the percentage of total net revenues
attributable to each category for the periods shown.
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1998 1997 1998 1997
------ ------ ------ ------
Net revenues:
Communications services .. 69% 69% 71% 75%
Nutritional products ..... 12 11 9 5
Marketing services ....... 19 20 20 20
--- --- --- ---
Total net revenues ..... 100% 100% 100% 100%
=== === === ===
Cost of services:
Communications services .. 10% 26% 12% 25%
Nutritional products ..... 8 5 5 2
Marketing services ....... 4 8 9 7
--- --- --- ---
Total cost of services . 22 39 26 34
Operating expenses:
Selling and marketing .... 50 38 43 39
General and administrative 51 32 26 32
--- --- --- ---
Total operating expenses 101% 70% 69% 71%
=== === === ===
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 1997
Revenues. Total net revenues are derived from sales of communications
services, nutritional products and marketing services net of any returns of
prepaid phone cards, distributor kits or other products. Total net revenues
increased $462,000, or 28%, to $2.1 million for the three months ended December
31, 1998 from $1.6 million for the same period in 1997. The increase in total
net revenues was primarily due to the growth in the number of IAs enrolled in
the Maxxis marketing network.
Communications services revenues increased $313,000, or 28%, to $1.4
million for the three months ended December 31, 1998 from $1.1 million for the
same period in 1997. This increase was primarily due to increased long distance
telephone commissions resulting from the Company's larger communications
customer base.
Nutritional products revenues increased $69,000, or 37%, to $255,000
for the three months ended December 31, 1998 from $186,000 for the three months
ended December 31, 1997. The increase was primarily due to the fact that there
were more selling days for the three months ended December 31, 1998 because the
Company did not begin selling nutritional products until November 1997.
Marketing services revenues increased $80,000, or 25%, to $398,000 for
the three months ended December 31, 1998 from $318,000 for the same period in
1997. This increase was largely due to an increase in the price of distributor
kits from $30 to $99.
Cost of Services. Cost of services includes communications services
cost, nutritional products cost and marketing services cost. Total cost of
services for the three months ended December 31, 1998 was $444,000, or 22% of
total net revenues, as compared to $634,000, or 39% of total net revenues, for
the same period in 1997. The decline in total cost of services as a percentage
of total net revenues resulted primarily from the improvement in communications
services margins.
10
11
Communications services cost was $201,000, or 10% of total net
revenues, for the three months ended December 31, 1998, as compared to $430,000,
or 26% of total net revenues, for the same period in 1997. This decrease as a
percentage of total net revenues was due mainly to the increase in long distance
usage commissions and access fees without a substantial incremental increase in
costs. Nutritional products cost was $159,000, or 8% of total net revenues, for
the three months ended December 31, 1998 as compared to $77,000, or 5% of total
net revenues for the same period in 1997. Marketing services cost was $84,000,
or 4% of total net revenues, for the three months ended December 31, 1998 as
compared to $127,000, or 8% of total net revenues, for the same period in 1997.
The overall decline in cost of services and cost of services as a percentage of
total net revenues results from a greater portion of the Company's revenues
coming from long distance telephone services.
Gross Margin. Gross margin increased to $1.6 million for the three
months ended December 31, 1998 from $1.0 million for the same period in 1997. As
a percentage of total net revenues, gross margin improved to 79% from 61% over
those respective periods.
Operating Expenses. For the three months ended December 31, 1998,
selling and marketing expenses were $1.1 million, or 50% of total net revenues,
as compared with $610,000, or 38% of total net revenues, for the same period in
1997. The increase in selling and marketing expenses as a percentage of total
net revenues for the three months ended December 31, 1998 is due to higher fees
paid to national training directors as a percentage of total net revenues and
higher commission payouts due to a new sales incentive program. General and
administrative expenses were $1.1 million, or 51% of total net revenues, for the
three months ended December 31, 1998, as compared to $514,000, or 32% of total
net revenues, for the same period in 1997. The increase in general and
administrative expenses is largely due to an increase in employees and higher
depreciation expense. Total operating expenses increased to 101% of net revenues
for the three months ended December 31, 1998 from 70% for the same period in
1997.
Income Taxes. The Company recognized an income tax benefit of $130,000
for the three months ended December 31, 1998 while there was no provision for
income taxes for the comparable 1997 period. The tax benefit partly offsets the
tax provision recorded for the three months ended September 30, 1998.
Net Loss. Net loss for the three months ended December 31, 1998 was
$483,000 as compared to a net loss of $134,000 for the same period in 1997. The
higher net loss is largely due to the higher operating costs, partly offset by
improved margins on communications services for the three months ended December
31, 1998.
SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 1997
Revenues. Total net revenues increased $3.7 million, or 109%, to $7.2
million for the six months ended December 31, 1998 from $3.4 million for the
same period in 1997. The increase in total net revenues was primarily due to the
growth in the number of IAs enrolled in the Maxxis marketing network.
Communications services revenues increased $2.5 million, or 98%, to
$5.1 million for the six months ended December 31, 1998 from $2.6 million for
the same period in 1997. This increase was primarily due to increased phone card
sales to the Company's IAs and increased long distance telephone commissions
resulting from the Company's larger communications customer base.
Nutritional products revenues increased $444,000, or 239%, to $630,000
for the six months ended December 31, 1998 from 186,000 for the six months ended
December 31, 1997. This increase was primarily due to the fact that the Company
did not begin selling nutritional products until November 1997.
Marketing services revenues increased $770,000, or 115%, to $1.4
million for the six months ended December 31, 1998 from $670,000 for the same
period in 1997. This increase was due to the growth in the numbers of IAs, the
increased attendance of the IAs at the Company's training schools and the
increased sales of promotional items and sales aids.
Cost of Services. Total cost of services for the six months ended
December 31, 1998 was $1.9 million, or 26% of total net revenues, as compared to
$1.2 million, or 34% of total net revenues, for the same period in 1997.
11
12
The decline in total cost of services as a percentage of total net revenues
resulted from the improvement in communications services margins which was
partially offset by declines in marketing services and nutrition margins.
Communications services cost was $908,000, or 13% of total net
revenues, for the six months ended December 31, 1998, as compared to $868,000,
or 25% of total net revenues, for the same period in 1997. This decrease as a
percentage of total net revenues was due mainly to the increase in long distance
usage commissions and access fees. Nutritional products cost was $360,000, or 5%
of total net revenues, for the six months ended December 31, 1998 as compared to
$77,000, or 2% of total revenues for the comparable 1997 period. Marketing
services cost was $637,000, or 9% of total net revenues, for the six months
ended December 31, 1998 as compared to $228,000, or 7% of total net revenues,
for the same period in 1997. The increase as a percentage of total net revenues
was primarily due to higher costs associated with the Company's 1998 annual
summit meeting, partly offset by higher margins on distributor kits.
Gross Margin. Gross margin increased to $5.3 million for the six months
ended December 31, 1998 from $2.3 million for the same period in 1997. As a
percentage of total net revenues, gross margin improved to 74% from 66% over
those respective periods.
Operating Expenses. For the six months ended December 31, 1998, selling
and marketing expenses were $3.1 million, or 43% of total net revenues, as
compared with $1.3 million, or 39% of total net revenues, for the same period in
1997. General and administrative expenses were $1.9 million, or 26% of total net
revenues, for the six months ended December 31, 1998, as compared to $1.1
million, or 32% of total net revenues, for the same period in 1997. The decrease
in general and administrative expenses as a percentage of total net revenues
reflects economies of scale in connection with the Company's growth. Primarily
as a result of the Company's lower general and administrative expenses as a
percentage of net revenues, total operating expenses declined to 69% of net
revenues for the six months ended December 31, 1998 from 71% for the same period
in 1997.
Income Taxes. As a result of the Company's profitability for the six
months ended December 31, 1998, provision for income taxes was $150,000 for the
six months ended December 31, 1998.
Net Income. Net income for the six months ended December 31, 1998 was
$232,000 as compared to a net loss of $168,000 for the same period in 1997. The
resulting net income for the six months ended December 31, 1998 reflects an
increase in total net revenues, improved margins on communications services and
a decline in general and administrative expenses relative to total net revenues.
LIQUIDITY AND CAPITAL RESOURCES
On September 29, 1998, the Company entered into a long-term lease
commitment for the exclusive use of the Maxxis Switch, along with certain
ancillary computer hardware and software required to operate the Maxxis Switch.
In connection with the lease of the Maxxis Switch, Maxxis made an initial
payment of $501,000. Monthly payments of $118,000 begin in February 1999 and
will continue for a period of five years.
On November 22, 1998, the Company entered into the Line of Credit with
the Maxxis Millionairre Society, a Georgia partnership. Ivey Stokes and Alvin
Curry, the Company's Chairman of the Board and Chief Operating Officer,
respectively, are partners in the Maxxis Millionairre Society. Pursuant to the
Line of Credit, Maxxis may borrow up to $1,000,000 at 10% annual interest. No
advances or interest thereon pursuant to the Line of Credit are payable until
November 22, 2000.
During the six months ended December 31, 1998, cash provided by
operating activities was $561,000, as compared to cash used by operating
activities of $86,000 for the same period in 1997. Operating activities for the
six months ended December 31, 1998 included $232,000 of net income, $252,000 of
depreciation and amortization and $39,000 related to changes in assets and
liabilities.
Cash used in investing activities was $569,000 for the six months ended
December 31, 1998, as compared to $317,000 for the same period in 1997.
Investing activities for the six months ended December 31, 1998 consisted
primarily of software development costs of $281,000 and capital expenditures
totaling $188,000.
12
13
Cash provided by financing activities was $55,000 for the six months
ended December 31, 1998, as compared to $317,000 for the same period in 1997.
Financing activities for the six months ended December 31, 1998 consisted of
$244,000 paid by the Company to third parties in connection with the preparation
of the Company's registration statement on Form S-1, payments on capital lease
obligations of $501,000 and borrowings pursuant to the Company's Line of Credit
in the amount of $800,000.
As of December 31, 1998, the Company had cash of $419,000 and a working
capital deficit of $205,000 as compared to cash of $372,000 and working capital
surplus of $180,000 as of June 30, 1998.
The Company anticipates that cash generated from operations, together
with proceeds from its equity offering to certain of its regional and executive
directors and its Line of Credit, will be sufficient to meet the Company's
capital requirements for the next 12 months. However, if the Company does not
receive sufficient funds from its operations, equity offering and Line of Credit
to fund its operations, the Company may need to raise additional capital. In
addition, any increases in the Company's growth rate, shortfalls in anticipated
revenues, increases in expenses or significant acquisitions could have a
material adverse effect on the Company's liquidity and capital resources and
could require the Company to raise additional capital. The Company may also need
to raise additional funds in order to take advantage of unanticipated
opportunities, such as acquisitions of complementary businesses or the
development of new products, or otherwise respond to unanticipated competitive
pressures. Sources of additional capital may include venture capital financing,
cash flow from operations, lines of credit and private equity and debt
financings. The Company's cash and financing needs for fiscal 1999 and beyond
will be dependent on the Company's level of IA and customer growth and the
related capital expenditures, advertising costs and working capital needs
necessary to support such growth. The Company believes that major capital
expenditures may be necessary over the next few years to develop additional
product lines to sell through its IAs and to develop and/or acquire information,
accounting and/or inventory control systems to monitor and analyze the Company's
growing multi-level network marketing system. The Company has not identified
financing sources to fund such cash needs in fiscal 1999 and beyond. There can
be no assurance that the Company will be able to raise any such capital on terms
acceptable to the Company or at all.
YEAR 2000 COMPLIANCE
The Company's business and customer relationships rely on computer
software programs, internal operating systems and telephone and other network
communications connections. If any of these programs, systems or network
communications are not programmed to recognize and properly process dates after
December 31, 1999 (the "Year 2000" issue), the Company could experience
significant system failures or errors, which could have a material adverse
effect on the Company's business, financial condition or results of operations.
The Company has not yet begun to review its computerized information
and non-information systems to identify internal accounting programs and
operating systems (collectively, "Systems") that might malfunction due to a
misidentification of the Year 2000. Although the Company has not yet undertaken
a review of its Systems, it believes that its Systems are adequately programmed
to address the Year 2000 issue or can be modified or replaced to address the
Year 2000 issue without material costs or delays. However, there can be no
assurances that these Systems are Year 2000 compliant. In addition, as its
review is in the early stages of assessment, Maxxis cannot predict whether
significant problems will be identified with its Systems. Therefore, the Company
has not yet determined the extent of contingency planning that may be required.
The Company may not be able to develop, implement or test remediation or
contingency plans with such Year 2000 problems or may find that the costs of
these plans exceed current expectations. If the Company fails to satisfactorily
resolve Year 2000 issues related to its Services in a timely manner, it could be
exposed to liability from third parties.
Furthermore, Maxxis has only made limited inquiries of third party
providers of products and systems used in its business and at its offices or on
the systems used by its IAs or other third parties. The Company has contacted
one provider of software used in Maxxis' operations and has received assurances
from this provider that its software is capable of addressing the Year 2000
issue. There can be no assurance, however, that any or all of the products and
services used and relied upon by the Company are Year 2000 compliant. Maxxis
believes that if its providers, IAs or other third parties do not successfully
address Year 2000 issues in their operations, the
13
14
Company's operations may be interrupted, hindered or delayed which could cause a
material adverse effect on the Company's business, financial condition and
results of operations. Maxxis further believes that CRC, its IAs and other third
parties may be in the preliminary stages of analyzing their software and systems
to address the Year 2000 issue. Therefore, the Company does not believe it is
possible to accurately analyze or predict possible "worst-case" scenarios
related to the Year 2000 issue and the potential impact on the Company's
business if any of these parties fail to adequately address the Year 2000 issue.
The Company has not developed a contingency plan for Year 2000 problems
experienced by CRC, its IAs or other third parties. Thus, the Company believes
it is impossible to estimate the potential expenses involved with a large scale
failure of CRC, the Company's IAs or other third parties to resolve their Year
2000 issues. The Company can provide no assurance that it will not suffer
business interruptions, either because of its own Year 2000 problems or those of
CRC, its IAs and other third parties whose Year 2000 problems may make it
difficult or impossible for them to fulfill their commitments to the Company.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). These statements appear in a number of places in this Report
and include all statements which are not historical facts and which relate to
the intent, belief or current expectations of the Company, its directors or its
officers with respect to, among other things: (i) the Company's financing plans,
including the Company's ability to obtain financing in the future; (ii) trends
affecting the Company's financial condition or results of operations, including
those related to Year 2000 issues; (iii) the Company's growth and operating
strategy; (iv) the Company's anticipated capital needs and anticipated capital
expenditures; and (v) projected outcomes and effects on the Company of potential
litigation and investigations concerning the Company. When used in this Report,
the words "expects," "intends," "believes," "anticipates," "estimates," "may,"
"could," "should," "would," "will," "plans" and similar expressions and
variations thereof are intended to identify forward-looking statements.
Investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those projected in forward-looking
statements as a result of: (i) factors affecting the availability, terms and
cost of capital; risks associated with meeting lease obligations and obtaining
necessary regulatory approvals in connection with the Maxxis Switch; competitive
factors and pricing pressures; general economic conditions; the failure of the
market demand for the Company's products and services to be commensurate with
management's expectations or past experience; the impact of present or future
laws and regulations on the Company's business; changes in operating expenses or
the failure of operating expenses to be consistent with management's
expectations; and the difficulty of accurately predicting the outcome and effect
of certain matters, such as matters involving potential litigation and
investigations; (ii) various factors discussed herein; and (iii) those factors
discussed in detail in the Company's filings with Securities and Exchange
Commission (the "Commission"), including the "Risk Factors" section of the
Company's Registration Statement on Form S-1 (Registration No. 333-38623), as
amended.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Not applicable.
14
15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to, nor is any of its property subject to,
any material legal proceedings. The Company may be subject from time to time to
legal proceedings that arise out of the Company's business operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit
Number Exhibit Description
- ------- -------------------
10.1 Line of Credit between Maxxis Group, Inc. and the Maxxis Millionairre
Society dated as of November 22, 1998.
10.2 Investment Agreement between InteReach Internet Services, LLC and
Maxxis Group, Inc. dated as of December 8, 1998.
10.3 Virtual ISP Agreement between InteReach Internet Services, LLC and
Maxxis Group, Inc. dated as of December 8, 1998.*
27 Financial Data Schedule (for SEC use only).
- ---------------------
* Confidential treatment has been requested for certain confidential
portions of this exhibit pursuant to Rule 24(b)(2) under the Exchange
Act. In accordance with Rule 24(b)(2), these confidential portions have
been omitted from this exhibit and filed separately with the
Commission.
(B) REPORTS ON FORM 8-K.
None.
15
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAXXIS GROUP, INC.
February 16, 1999 /s/ Thomas O. Cordy
---------------------------------------------
Thomas O. Cordy
President and Chief Executive Officer
(Principal executive officer)
February 16, 1999 /s/ Daniel McDonough
---------------------------------------------
Daniel McDonough
Chief Financial Officer
(Principal financial and accounting officer)
16